How a Line of Credit Can Help You Manage Your Money in Canada

A line of credit has become a popular credit option for anyone banking in Canada. Here’s how it works and how to get the most out of it. 

How does a line of credit work? 

A line of credit is a flexible way to borrow money from a bank or other financial institution in Canada. There are two types of lines of credit in Canada: secured and unsecured. A secured line of credit can be secured against your home (commonly referred to as a Home Equity Line of Credit – or HELOC) or against other assets, such as investments. With an unsecured line of credit, which will be the focus of this article, there is no asset securing your loan.

If approved for a line of credit, you’ll receive a specific credit limit at a certain interest rate. At any given time, you can use as much¹ or as little of this limit as you need to. As you pay back what you borrow, that amount of your credit limit becomes available to you again – there’s no need to re-apply when you need to use your credit.

This flexibility is one of the main benefits of a line of credit, but there are other advantages that contribute to its popularity. These include:

• You only pay interest on the amount you use

• You can pay off your balance at any time, but a minimum monthly payment is required if you have a balance. The minimum payment each month must cover at least the interest on what you borrowed and any insurance premiums, if applicable

• You can easily access the funds from your line of credit, typically through an ATM, cheque, online transfer or at a branch 

New to Canada? Here’s additional information about lines of credit that can be helpful for you.

What interest rate is charged on a line of credit?

The interest rate on a line of credit is usually variable, which means it can go up or down depending on market conditions. This rate is made up by adding a variable rate (known as the lender’s ‘Prime Rate,’ which can change at any time – but usually fluctuates when the Bank of Canada makes a rate change), plus a fixed rate (the premium or discount rate you qualified for).

This fixed rate is influenced in part by your credit score – the higher your credit score, the lower your interest rate may be. Learn more about your credit score here, including what affects your score, how to improve it and the advantages of a strong score.

Save money by paying off higher-interest loans

As a general rule, interest rates for lines of credit are typically lower than those on credit cards (secured lines of credit generally have lower interest rates than unsecured lines of credit because they are secured against assets, such as a home or investments).

This means that if you’re carrying a balance on one or more credit cards, you could save money on interest when you use your line of credit to pay off a higher-interest-rate loan (such as a credit card).

As an example, let’s say you have a $10,000 balance on your credit card that has a 20.99% interest rate. If it took you one year to pay that balance, your monthly payment would be $931.09, and the total interest paid in the year would be $1,173.08.

However, if you transferred that balance to a line of credit at a 10% interest rate², it would cost you $879 a month, and the total interest paid in the year would be $549.

That’s a savings of $623.17 by using your line of credit instead of your credit card. Not only are you saving on your interest paid, but your monthly payments are lower, which can help you manage your cash flow.

Personal lines of credit vs. personal loans

Loans and lines of credit are both forms of credit, meaning they are ways to borrow money in Canada. However, there are some key differences between the two.

Reusable versus one-time use of credit

With a line of credit, you are given a revolving credit limit, which means you can use as much or as little of the credit limit you were assigned at any time. As you pay off your balance, you can reuse it without having to reapply.

With a loan, you get a non-revolving credit limit, which means you are given a single lump sum upfront, with a fixed monthly payment schedule. As you pay off your balance, you do not have access to use it again without reapplying.

Interest

With a line of credit, you pay interest only on the amount you borrow (and any applicable insurance payments) for as long as you borrow the money.

With a loan, you have access to the funds only once and will have a fixed payment amount that you will pay each month until the loan is paid off. 

Payments

With a line of credit, you are required to make minimum monthly payments when you carry a balance, including any applicable insurance payments, and you can pay off a portion or all of your balance at any time.

When you take out a loan, you have set payments on a fixed schedule, such as 36 payments over a three-year period. Payments are made up of principal and interest on the full loan amount, which means your loan will be paid off in full by the end of the set period. If your budget allows it, you can also make prepayments which will help reduce the principal balance and shorten the loan term, ultimately saving on interest.

Tips to get the most from your line of credit 

Your line of credit can be a very flexible way to borrow the money you might need to cover life’s planned and unplanned expenses. Here’s how to get the most out of it:

• Only borrow what you need and avoid using it for impulse purchases – you’ll pay less in interest and keep more of your credit limit available for unexpected or emergency expenses

• Transfer higher-interest debt to your line of credit to save money. A lower cost of borrowing can help you reduce your debt faster and help with day-to-day cash flow

• If you have multiple credit cards with balances, consolidating your debt onto one line of credit can make it easier to manage your payments and reduce your financial stress

• Pay down the balance when you can – it’s a good idea to add a repayment amount to your budget so that you can reduce your balance over time. If your minimum payments cover interest only, you will not bring down your balance with these payments alone

What is involved in getting approved for a line of credit?

When applying for a line of credit, the lender will look at a few things, such as your income, your current level of debt, and your credit score.

You can check your credit score at either of Canada’s two main credit bureaus – Equifax or TransUnion. RBC Online Banking customers can also access a free credit report here.  

• Struggling with your credit score? Read this article about ways to rebuild it

• If you’re new to building a credit history, here are some tips to get started

It’s easy to apply for a line of credit. RBC credit specialists can help! If you want to learn more about RBC’s line of credit options, visit our Line of Credit page.

To learn more, visit an RBC branch and speak with one of our advisors.

• Please Note: Like most credit products, obtaining and/or using a line of credit (including by transferring balances from other products) may impact your credit score.

• Interest rate used as an example.